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The high-profile collapses of UK household names like BHS, Carillion and Thomas Cook in recent years have put the spotlight on the country’s audit industry. A government overhaul, after a number of reviews and investigation, was announced this March.
It’s not a topic that has generally been at the top of investors’ minds, says Caroline Escott, Senior Investment Manager at UK pension scheme Railpen, who remembers “eyes tending to glaze over” when she would discuss it with investors in her former policy role at the Pensions and Lifetime Savings Association (PLSA).
But it’s been a key focus for the £32bn railway-workers’ fund.
“Investors need to be able to rely on the accounts of a company as representing a true and fair view of a company’s financial health,” says Escott.
Railpen typically votes against audit committee chairs if the external audit firm tenure is greater than 30 years. This year, it will also vote against audit committee members and the reappointment of auditors if there are significant audit fee reductions with no clear rationale.
‘I miss the face to face interaction – there’s nothing quite like being in the same room as a company. You can see the whites of their eyes and their full body language, not just what you can see on a screen’
On top of that, the fund is now turning its attention to climate, with companies – especially high emitters – at risk of having their report, accounts, audit committee chair or re-appointed auditor voted against if they don’t include climate risk information in their financial statements.
And this kind of investor engagement is bearing fruit. Earlier this year, the six largest accountancy firms committed to “playing their part” when it comes to assuring that climate risk is properly reflected in company financial statements.
“The next step is to have conversations with the audit committees and auditors to make our expectations clear on explicitly considering climate change in the accounts,” says Escott. “And to make sure there is consistency between the narrative reporting and the back end of the accounts.”
Railpen is using research by Carbon Tracker and the Climate Accounting Group to analyse which of its carbon-intensive holdings are doing Paris-aligned accounting.
“I would say it’s essentially non-existent,” says Escott. “There are some auditors which have explicitly mentioned climate change as a key or critical audit matter, which is good practice, and there have been some audits that have checked that climate commitments being made in the front of the reports match up with the accounts.”
But in general, she says, there is still a lot of progress needed.
“We speak to companies that might be really far advanced on TCFD reporting, and are incorporating science-based targets, but when you raise climate accounting there’s slight confusion on their faces.
“The climate transition is a huge, sprawling and urgent issue to deal with. Hopefully Railpen can help influence a really material and unexplored piece of the puzzle by working with investors like Sarasin and others involved with Climate Action 100+.”
Escott is referring to Railpen’s work with ClimateAction100+, the multi-trillion-dollar shareholder engagement network, where it heads up climate accounting efforts with a number of undisclosed, high-emitting companies. As well as this, the fund helps coordinate climate-related engagement with Heidelberg Cement, Nestle and building materials multinational CRH. It also plans to take on Colgate-Palmolive.
“It’s wonderful to think about the huge level of assets and investors pulling in the same direction,” says Escott. “But Climate Action 100+ has also done a really good job of giving investors the freedom and time to develop their own model of engagement that works best for them, while providing a lot of support such as model resolutions and the Net Zero benchmark.”
Railpen is also prioritising its engagement with technology firms this year, on a range of issues including content moderation, human rights, governance and dual class shares. It comes on the back of the scheme joining an investor coalition on human rights and technology led by the Swedish Council of Ethics.
“We have some significant holdings in tech firms,” says Escott. “We note that multiple class shares are particularly prevalent at some US tech companies and it’s really important to be able to exercise your vote in a way that is heard by the company. It’s a vital stewardship tool.”
Escott joined Railpen seven months ago, after being headhunted from the PLSA, where her work on diversity and inclusion had seen her voted Investment Woman of the Year in 2019. Last year was named one of the top 25 rising stars in European Asset Management.
This AGM season is her first at the coalface of engagement, but during her time at the PLSA she engaged with companies on workforce disclosure, arranging dialogues with investors and creating an in-house benchmark on their practices. Railpen is currently working with PLSA and the Chartered Institute of Personnel and Development on how companies should disclose their workforce in the wake of Covid-19.
Escott says engaging during Covid has pros and cons.
“I miss the face to face interaction – there’s nothing quite like being in the same room as a company. You can see the whites of their eyes and their full body language, not just what you can see on a screen, which helps you understand whether they are really taking on board what you are saying and whether the penny has dropped.
“Key to a successful engagement is developing a long-term relationship where there is a certain level of trust and it is harder to build those relationships on screen.”
Railpen, says Escott, is trying to move away from audio-only conference calls “where you can’t see anyone’s face” and trying to encourage people to keep their videos on.
There are upsides to the new ubiquity of conference calling, though, she adds, because it makes access to overseas executives easier.
Once AGM season is over, Escott says her next piece of work will be engaging with beneficiaries more directly on responsible investment. Railpen has traditionally had close links to its 350,000 members with the entire trustee board nominated by either employers or members.
“It wouldn’t be just a one-time survey,” she says. “We need to take members on a journey; explain to them what responsible investment is and give them a flavour of the different debates out there.
“I want to encourage members to give feedback to us directly. It doesn’t happen as much as we would like but when you do get a member getting in touch with us about a specific company AGM it is really helpful to be able to have that direct interaction.”